Private equity and other alternative asset management firms are moving down market to support the retail marketplace, according to a new report from Cerulli Associates.
So far, these firms have raised a relatively small amount of total retail assets, Cerulli said in a statement. But as these firms’ product lineups expand, they will widen their appeal beyond institutional investors and grow their share of retail assets.
“Private investment managers, following in the tracks of hedge-fund-focused alternative firms and traditional long-only managers, are tapping the public markets,” Michele Giuditta, associate director at Cerulli Associates, said in the statement.
“These firms have been hard at work identifying ways to make illiquid private investments more mainstream and allow smaller investors into their funds.”
Demand for alternative assets across institutional and retail channels remains high, Cerulli reported, continuing a trend it identified a year ago.
Fifty-seven percent of asset managers surveyed cited requests from institutional investors and 52% from financial advisors.
At the same time, 55% said interest from distributors/platforms was gaining importance as a key driver of demand.
The number of asset managers offering alternative products has grown along with allocations to alternative assets.
Alternative managers are expanding strategy offerings to institutional investors, and moving down market to diversify their client base and product lineup by manufacturing liquid alternative mutual funds.
In addition, some traditional asset managers are seeking growth opportunities by diversifying their product roster to include alternative investments.
Cerulli found that 69% of asset managers looking to grow their alternatives capabilities choose to build their business internally in order to maintain control over product development and distribution.
However, demand for alternatives is so intense that many are finding the quickest way to put product into distribution is by hiring either an experienced portfolio management team or a subadvisor or by acquiring a specialty shop.
In the near term, the interest in alternatives remains robust. Cerulli said it expected interest in alternatives to remain robust in the near term, citing data from Preqin, an alternative investments data provider.
At the end of 2013, Preqin said the majority of institutional investors planned either to increase or maintain their allocations to the major alternative asset classes over the next 12 months.
Another Preqin study found that the vast majority of hedge fund investors were satisfied with 2013 performance.
Mutual fund alternative assets are also expected to grow, with asset managers polled by Cerulli expecting to double their share of total mutual fund assets in just two years.
Survey respondents predicted assets would grow by 6% in two years, 9% in five years, and 14% in 10 years.
Cerulli said that while advisors recommend alternative allocations ranging from 5% to 25% for individual investors, depending on their risk tolerance, average allocations in client portfolios were currently typically less than 5% — a big opportunity for investment managers to raise assets through efforts to close the educational gap that exists around alternative products.
The Way Forward
Challenges lie ahead, Cerulli reported, starting with regulations that have recently come into effect in the U.S. and the European Union.
As well, competitive pressures are mounting. The report noted that more than 13,000 alternative funds are on offer around the world.
In this buyer’s market, increasingly experienced institutions, advisors and individual investors are placing heavier demands on asset managers in the form of improved fee structures and terms and increased transparency and liquidity.
Investors also want structures that allow for customization and more flexibility, the report said.
In light of its research findings, Cerulli made several recommendations to asset managers.
For success in the retail marketplace, it said asset managers should devote resources to training and educating intermediaries and distributors on how alternative investments work and fit into investors’ overall portfolios.
In addition, alternative asset managers that lack retail distribution forces should consider teaming up with experienced mutual fund manufacturers.
Fund-of-funds providers, which are still hurting from the financial crisis, should use their manager due diligence expertise to develop long-only manager-of-manager products, or multi-strategy alternative products using a mutual fund wrapper.
Finally, Cerulli noted a trend whereby many advisors and investors are transforming their asset allocation approach, opting to allocate assets according to the role they play in a portfolio rather than view alternatives as a separate asset class.
Managers that want to take advantage of this trend, Cerulli said, should educate advisors and investors on the objective of their strategies, connecting the products’ objective with the investors’ overall portfolio goals.
Check out Mutual Funds ‘Vehicle of Choice’ for Alt Investments on ThinkAdvisor.